Bonds weaken as rand falls on disappointing inflation data
South African bonds were weaker on Wednesday afternoon as the market followed the softer rand, which lost ground following the release of slightly higher inflation numbers. A pause in the recent dollar rally, however, kept losses in check.
Local bond yields rose following relatively small inflows into the local market on Tuesday, despite a weaker rand.
On Wednesday the rand lost a further 1.2% to the dollar as the local currency continued to react negatively to President Jacob Zuma’s unexpected Cabinet changes on Tuesday. The reshuffle is bound to cause further political turmoil ahead of the medium-term budget policy statement next week.
"The political space is still in flux and we can expect that further Cabinet reshuffles may sour sentiment, providing better bond entry levels in future," said Sasfin bond trader Alvin Chawasema.
Inflation‚ as measured by the annual change in the consumer price index (CPI)‚ accelerated to 5.1% in September from 4.8% in August, worse than economists’ consensus of 4.9%, It is, however, still comfortably within the Reserve Bank’s target range of 3%-6%.
At 3pm the R186 was bid at 8.755% from 8.73% and the R207 at 7.425% from 7.405%.
The rand was at R13.553 to the dollar from R13.3927. The euro was at $1.1765 from $1.1768.
The US bond market was a little weaker, struggling to find clear direction on the expected future path of interest rates in the US. The market was pricing in a 25-basis points hike by the US Federal Reserve in December.
Investors had been keeping a close eye on global central banks amid speculation about the next chair of the Fed and the European Central Bank’s plans to unwind its huge bond-purchase programme ahead of its October meeting, Dow Jones Newswires reported.
Yields on 10-year German government bonds rose to 0.391% from 0.362%, while US 10-year treasury yields rose to 2.338% from 2.300%. Yields move inversely to prices.
"While the Fed may have signalled an intention to raise interest rates once more this year and three times next year, a number of policy makers have since expressed concern at the lack of inflation," said Oanda analyst Craig Erlam.
The Fed has previously warned that consumer inflation needs to rise more measurably from present levels to justify further rate hikes.
The UK 10-year gilt was last at 1.3135% from 1.2753%.